Your Low Cost Country Sourcing Partners (www.pinnaclesourcing.net) Page 1

Pinnacle Sourcing and Consultancy Private Limited, C-43 GF, Sushant Lok Phase II Sector 56, Gurgaon-122002, India. Visit us on www.pinnaclesourcing.net

Welcome to the first edition of

"Pinnacle Buzz”– a quarterly newsletter

designed to keep you informed on the

latest developments in strategic sourcing,

procurement, macro-economic and key

commodity trends with a special focus on

low cost countries.

As a leading global sourcing and supply

chain consulting company, we deliver

pragmatic and innovative end to end

sourcing and consulting solutions that

enable organizations to manage their

procurement activities effectively and

efficiently helping them achieve a path of

greater profitability.

Pinnacle greatly values your interests and

opinion, and you have been identified as a

key stakeholder. As such we have

included you on our mailing list for this

first edition. If you do not want to

continue receiving this quarterly

newsletter then please send us an email

with an unsubscribe note. We are also

open to and shall very much appreciate

your feedback.

I also wish all the very best to you

personally and professionally!

Yours Sincerely

Himanshu Kapoor

Managing Director

Inside the issue:

FDI in India 1

The end of Cheap China 3

Turbulent Times for Iron Ore

industry ahead

4

Launch of Optex Pinnacle

Private Ltd.

5

FDI in India

On September 14, 2012, the Government of India

issued a series of major announcements designed to reinvigorate the Indian economy. The government will now permit foreign direct investment (FDI) in multi-brand retail up to a level of 51%. FDI in aviation will now be allowed to a level of 49%.

Inflows of foreign direct investment ( FDI) into India fell 13.5 percent in 2012, but prospects for attracting these funds are higher in the future as the country liberalised its trade, says the United Nations Conference on Trade & Development. In spite of the uncertain global economic climate, foreign investors anticipate India to be an attractive investment option. The top four industry sectors which are prone to attract FDI for India this year and onwards are:

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1. Infrastructure Infrastructure contributes 4% in FDI projects and 9% of the total jobs created in India. At the moment, infrastructure spending is USD 500 Billion which the Government of India plans to increase by USD 1 Trillion in the next five years. Foreign direct investment within the infrastructure industry has meanwhile grown by 90%.

2. Automotive India’s automotive Industry is one of the largest and rapidly growing industries in the world. At the moment, it is the sixth largest vehicle manufacturing nation. India’s production has risen five times in the last two decades. The country has seen 78 FDI deals in this sector by 2011 which has grown 28% since 2010. At the moment, India’s automobile sector contributes 8% of all FDI projects and 16% of all jobs created within FDI deals.

3. Retail and Consumer Products The FDI announcement, as it relates to multi-brand retail, will open the flood gates for foreign investors and financial institutions now. This sector covers 10% of all FDI projects and is expected to create 28,400 jobs. Also, FDI deals in the consumer product sector increased by 31%

Recently India's foreign investment panel has approved Swedish retailer IKEA's 1.9 billion USD plan to set up 10 furnishing and homeware stores as well as allied infrastructure over 10 years in India.

With India’s growing per capita income and a rising middle class, the retail sector has the potential to be the real growth engine of the country’s economy.

4. Technology India’s technology sector has grown rapidly in recent months. At the moment, its size is USD 80 Billion as of 2011. Meanwhile, around 10 million people are directly or indirectly employed in this sector. The major technology hubs are Bangalore, Hyderabad, Pune, Chennai, Mumbai and Kolkata which cater to IT-ITES and IT-BPO.

The FDI inflows are likely to moderately grow in 2013 and 2014 on account of liberalized government FDI policy in sectors including multi-brand retail, single-brand retail, commodity exchanges, power exchanges, broadcasting, non-banking financial institutions and asset reconstruction companies.

Your Low Cost Country Sourcing Partners (www.pinnaclesourcing.net) Page 3

End of Cheap China

The cost of doing business in China is

on the rise, with sharp increases in

wages and land costs, prompting

concerns the nation's competitiveness

could be threatened.

Government in the major cities of Beijing,

Shaanxi and Zhejiang moved this week to grant

workers a New Year pay rise, with an increase in

the "labour payment standard". The rise in the

Chinese equivalent of the minimum wage comes

after the ruling Communist Party recently outlined

its objective to double workers' wages by

2020.The wage increases in the three cities will be

about 10 per cent and come on top of raises of 10

to 20 per cent in the past year. Most China

observers believe the moves will be matched

across the country in the next few months.

The wage rises, if sustained, could damage China's

powerful manufacturing sector, which is starting

to show renewed signs of life. The 18th Party

National Congress in November said it wanted

wages for lowly paid workers to double over the

next seven years, in line with the nation's

economic growth and rapid urbanisation.

While the minimum payments remain low by

Western standards, the increases are being felt

among China's business owners. The Ministry of

Commerce estimates that wages have risen by 33

per cent in the past three years.

Many Chinese manufacturers have also been

forced to relocate from coastal China to the

country's hinterland, or even to Southeast Asian

counties, due to rising costs. India, Vietnam and

Bangladesh have become increasingly popular

among European and American business, since the

wages of workers in these countries are lower

than in China.

A consultancy offers this intriguing extrapolation:

if China's currency and shipping costs were to rise

by 5% annually and wages were to go up by 30% a

year, by 2015 it would be just as cheap to make

things in North America as to make them in China

and ship them there (see chart). In reality, the

convergence will probably be slower. But the

trend is clear.

Looking at the most recent Five Year

Plan published last year, rising labor

costs will not go away: it is an explicit

target of the central government to raise

minimum salaries by 13% each year.

Compounded over 5 years this makes

84%, almost a doubling of minimum

wages from 2011 to 2015!

Does this policy spell the end of China as a

production base for the world?

Obviously, productivity increases are getting

harder to achieve as the economy is more

developed; still, manufacturing in China is

practically not automated and the potential for

efficiency gains is enormous. China’s

infrastructure, logistics and supply chain is

improving, so that materials and components

made in China (capital rather than labor intensive)

remain most competitive. An anticipated 8.6%

growth expected till 2015 and low inflation of 3.5

compared to peers, it is difficult to identify a

contender as new “Workshop of the World”.

Reference: http://www.economist.com/node/21549956

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Turbulent Times for Iron

ore industry ahead

Iron ore industry is to remain turbulent through

the next few years: With the disruption of supplies

from India, concerns over slowing economic

growth in China, and the effects of large stockpiles

forcing the price of iron ore through a series of

supposed “price floors”, the iron ore industry has

faced a turbulent time during 2011 and 2012. Iron

ore has surged 68 per cent since slumping to a

three-year low in September as China, the world’s

biggest buyer, accelerated for the first time in two

years and mills rebuilt inventories.

Increased concentration, vertical integration and foreign ownership is likely

From 2006 to 2011, the promise of a high return on investment led to a decrease in the concentration of corporate control of seaborne trade in iron ore. During this period, the share of seaborne trade controlled by Rio Tinto, BHP Billiton and Vale (the “Big Three”) fell to 57.3% of the world total. This trend is expected to reverse to 2020, as the limited availability of capital will make securing project financing increasingly difficult for emerging producers. Much of the increase in capacity is expected to come from capacity expansions in Australia and Brazil and from projects backed by leading steel producers seeking to secure future supply.

New capacity will exceed growth in demand and force high-cost operations out of the market

Downward revisions in the long-term outlook for iron ore demand and prices are likely to lead to the delay, suspension or cancellation of a large number of projects. Nonetheless, it is estimated that 425Mtpy of nameplate capacity will be added from the middle of 2012 to the end of 2014 and

that capacity additions will continue to exceed 100Mtpy through to 2020. These additions are likely to exceed demand growth and mostly represent low to medium-cost.

operations. Consequently, producers at the higher end of the cost curve – particularly those in China – will gradually find themselves unable to compete in the open market.

Demand for steel is expected to grow at a slower rate

In 2012, a destocking phase among steel producers depressed demand for iron ore and the World Steel Association expects apparent consumption of finished steel products to grow by only 2.1% in 2012, down from 6.2% in 2011. A partial recovery appears likely, as the construction sector in China and increased infrastructure spending will support growth in demand. During the period to 2020, however, rising demand from other emerging nations is unlikely to fully offset the slowing pace of growth in the intensity of steel use in China, as this country approaches a peak in per capita steel consumption.

It is anticipated that growth in apparent crude steel use to average 2.9%py from 2012 to 2020. Owing to the on-going shift of steel production to countries with a higher use of iron ore per unit of steel, analysts’ forecasts that demand for iron ore, at 3.1%py, will marginally outpace steel demand, despite a relative increase in the use of scrap metal.

Prices are likely to remain volatile

Uncertainty over the Eurozone affects the iron ore industry through its effect on demand, as well as on the reduced availability and higher cost of capital. Revisions of figures on Chinese growth targets and performance are likely to result in further short term peaks and troughs, although much of the adjustment to a more realistic outlook has already taken place – albeit some rebound from excessive and unwarranted pessimism may be expected. Other risk factors include growing resource nationalism, particularly in Africa, highly unpredictable energy costs, rising labour costs, and the fate of the Indian mining industry following the mining bans in Goa and Karnataka states. Following the slump in prices from June to September 2012, Roskill expects prices to remain above US$120/t cfr for 63.5% Fe content Indian fines until the end of 2014, while a restocking phase may push prices towards US$135/t during

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2013, although large fluctuations are not unlikely. As new capacity comes on-stream, the industry’s price floor will gradually drop and Roskill expects that the US$100/t price level will be repeatedly tested and eventually broken towards 2015. In its baseline scenario, and adjusting for inflation, Roskill expects that prices may trend towards US$85 to US$95/t during 2016 to 2020

Reference: Roskill Iron Ore: Market Outlook to 2020, 7th

Edition, 2012

Launch of Optex Pinnacle Private Limited

OPTEX PINNACLE INDIA PRIVATE LIMITED is a joint venture between OPTEX Co. Ltd. (HQ in Japan) and Pinnacle Sourcing & Consultancy, a supply chain consulting and global sourcing firm, (HQ in Gurgaon, India). Optex with annual revenues of USD 300 Mn manufactures a range of advanced sensors and peripheral devices that contribute to creating a secure, safe, and comfortable society.

Company Name: OPTEX PINNACLE INDIA PRIVATE LIMITED

Investment Format: Joint Venture

Establishment: December 2012 Location: Gurgaon, Haryana, India

Industries: Marketing and sales of

security, access control and factory automation equipment

[Comments by Nori Ueda, Managing Director,

OPTEX PINNACLE INDIA PRIVATE LIMITED]

“In India, security guards are currently utilized as

the main solution for security needs. As a result,

the introduction of electronic security systems has

lagged behind the use levels seen in other

countries. However, as the Indian economy

continues to grow and labor costs rise, projections

are for a shift to demand for greater use of

electronic security. As this change comes to pass,

it will be vital to provide solutions closely in tune

with the culture and the customs of India.”

[Comments by Himanshu Kapoor, Director, OPTEX

PINNACLE INDIA PRIVATE LIMITED]

“Pinnacle Sourcing & Consultancy is delighted to

be entering into a strategic alliance with OPTEX,

and we are confident that this marks the start of

an enduring win-win relationship. OPTEX-Pinnacle

will work to meet the expanding needs of the

Indian security industry with a host of innovative

high-tech products from OPTEX. Teamed with

Pinnacle’s profound knowledge of the local

market, the new company will excel in delivering

superior value to all stakeholders.”

Pinnacle Sourcing & Consultancy

Pvt. Ltd.

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Gurgaon-122002, India

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